The Recent Pullback In Airline Stocks Doesn't Scare This Bull

Amid the recent pullback in airline stocks, Imperial Capital retained its In-Line ratings on the Big 3 airlines: American Airlines Group Inc AAL, Delta Air Lines, Inc. DAL and United Continental Holdings Inc UAL.

Imperial’s best ideas are Outperform-rated JetBlue Airways Corporation JBLU, Hawaiian Holdings, Inc. HA, Southwest Airlines Co LUV, Spirit Airlines Incorporated SAVE, and Atlas Air Worldwide Holdings, Inc. AAWW.

Analyst Michael Derchin says the above stocks are trading at attractive valuations, with improving fundamentals, including unique brands, productivity improvement efforts, and growth potential with less geopolitical and global economic risks.

How The Sector Will Fare

On the sector front, Derchin says 2017 is likely to be a transition year for airlines, with margins under pressure due to greater than anticipated domestic and international capacity growth, unit revenues lagging previous expectations, spiking labor costs, and rising jet fuel prices.

“The industry is about to see an increase in capacity in 2017 in two large markets, San Francisco and Chicago, as a result of two events: 1) the merger of Alaska Airlines and Virgin America and 2) the completion of United's new management team’s strategic review,” Derchin wrote in a note.

The analyst now expects domestic capacity to increase 3 percent in FY2017, versus 2 percent previously. Unit revenue growth is likely to lag previous expectations, after a choppy first quarter, largely due to weather and a late-Easter distorting comparisons.

“While we expect RASM to turn positive for the industry in 2Q17, the outlook for 2H17 and FY18 is more uncertain due to recent capacity additions from UAL and ALK, and potential competitive responses,” Derchin added.

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